What is annualizing?

Annualizing means taking a partial year amount and converting it to a full year amount. We will use several examples to illustrate how this works.

A person having a monthly salary of $4,000 is earning an annualized salary of $48,000 ($4,000 per month multiplied times 12 months in a year).

A person with a semimonthly salary of $3,000 is earning an annualized salary of $72,000 ($3,000 multiplied times 24 semimonthly pay periods).

A company having to pay an interest charge of 1.5% per month on its unpaid bills is experiencing an annualized interest rate of 18% (1.5% per month multiplied times 12 months).

A vendor's invoice having an early payment discount of "1/10, net 30" means that 1% can be saved if the amount owed is remitted within 10 days instead of the required 30 days. This 1% savings for paying 20 days early can be annualized by multiplying both the 1% and the 20 days by "18" to arrive at an annualized rate of approximately 18%.

A vendor's invoice having an early payment discount of "2/10, net 30" means that 2% can be saved if the amount is remitted within 10 days instead of the required 30 days. This 2% savings for paying 20 days early can be annualized by multiplying both the 2% and the 20 days by "18" to arrive at the annualized rate of approximately 36%. An annualized interest rate of 36% for a "riskless investment" of the amount owed is an amazing opportunity (as is an annualized rate of 18%). It also indicates that a company without sufficient cash to pay within the early payment discount period will experience a huge opportunity cost.